Conversant, Inc.
VALUECLICK INC/CA (Form: 10-Q, Received: 08/07/2012 17:27:35)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from       to       
 
Commission file number 000-30135
 
VALUECLICK, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
77-0495335
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
30699 RUSSELL RANCH ROAD, SUITE 250
WESTLAKE VILLAGE, CALIFORNIA 91362
(Address of principal executive offices, including zip code)
 
(818) 575-4500
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes  x  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yes  x  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer  x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes  o  No  x
 
The number of shares of the registrant’s common stock outstanding as of August 3, 2012 was 75,090,890 .


Table of Contents

VALUECLICK, INC.
INDEX TO FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Certification of CEO - Sarbanes-Oxley Act Section 302
 
Certification of CFO - Sarbanes-Oxley Act Section 302
 
Certification of CEO and CFO - Sarbanes-Oxley Act Section 906

2

Table of Contents

PART I. FINANCIAL INFORMATION  

ITEM 1. FINANCIAL STATEMENTS

VALUECLICK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
 
June 30, 2012
 
December 31, 2011
ASSETS
 

 
 

CURRENT ASSETS:
 

 
 

Cash and cash equivalents
$
88,156

 
$
116,676

Accounts receivable, net
118,755

 
129,076

Prepaid expenses and other current assets
10,570

 
8,092

Income taxes receivable
10,902

 
7,112

Deferred tax assets, current portion
10,058

 
9,977

Total current assets
238,441

 
270,933

Note receivable, less current portion
28,650

 
29,700

Property and equipment, net
26,145

 
19,952

Goodwill
433,850

 
437,033

Intangible assets acquired in business combinations, net
96,258

 
114,007

Deferred tax assets, less current portion
10,555

 
8,018

Other assets
1,094

 
1,068

TOTAL ASSETS
$
834,993

 
$
880,711

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

CURRENT LIABILITIES:
 

 
 

Accounts payable and accrued expenses
$
115,795

 
$
123,863

Other current liabilities
2,325

 
1,753

Borrowings under credit agreement, current portion
10,000

 
10,000

Total current liabilities
128,120

 
135,616

Income taxes payable
22,703

 
22,755

Deferred tax liabilities
1,069

 
1,447

Borrowings under credit agreement, less current portion
162,500

 
157,500

TOTAL LIABILITIES
314,392

 
317,318

 
 
 
 
Commitments and contingencies (Note 10)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 

 
 

Convertible preferred stock, $0.001 par value; 20,000,000 shares authorized; no shares issued or outstanding at June 30, 2012 and December 31, 2011

 

Common stock, $0.001 par value; 500,000,000 shares authorized; 75,109,455 and 80,139,493 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively
75

 
80

Additional paid-in capital
528,285

 
552,608

Accumulated other comprehensive loss
(12,533
)
 
(10,138
)
Retained earnings
4,774

 
20,843

Total stockholders’ equity
520,601

 
563,393

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
834,993

 
$
880,711


See accompanying Notes to Condensed Consolidated Financial Statements

3

Table of Contents

VALUECLICK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
 
Three-month Period
Ended June 30,
 
Six-month Period
Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Revenue
$
160,982

 
$
125,062

 
$
313,834

 
$
241,573

Cost of revenue
64,880

 
56,450

 
123,841

 
108,424

Gross profit
96,102

 
68,612

 
189,993

 
133,149

Operating expenses:
 

 
 

 
 

 
 

Sales and marketing
20,879

 
14,274

 
42,059

 
26,906

General and administrative
19,887

 
13,562

 
39,770

 
26,085

Technology
16,914

 
10,853

 
33,005

 
21,019

Amortization of intangible assets acquired in business combinations
6,321

 
3,389

 
12,645

 
6,097

Total operating expenses
64,001

 
42,078

 
127,479

 
80,107

 
 
 
 
 
 
 
 
Income from operations
32,101

 
26,534

 
62,514

 
53,042

Interest and other income, net
1,497

 
657

 
1,726

 
1,065

Income before income taxes
33,598

 
27,191

 
64,240

 
54,107

Income tax expense
13,262

 
10,210

 
22,333

 
20,264

Net income
20,336

 
16,981

 
41,907

 
33,843

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation
(6,059
)
 
953

 
(2,395
)
 
6,281

Total comprehensive income
$
14,277

 
$
17,934

 
$
39,512

 
$
40,124

 
 
 
 
 
 
 
 
Basic net income per common share
$
0.26

 
$
0.22

 
$
0.53

 
$
0.42

Diluted net income per common share
$
0.25

 
$
0.21

 
$
0.52

 
$
0.42

 
 
 
 
 
 
 
 
Weighted-average shares used to calculate net income per common share:
 

 
 

 
 
 
 
Basic
78,720

 
78,981

 
79,529

 
79,829

Diluted
80,336

 
80,059

 
81,221

 
80,847

 
See accompanying Notes to Condensed Consolidated Financial Statements


4

Table of Contents

VALUECLICK, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share data)
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2011

 

 
80,139,493

 
$
80

 
$
552,608

 
$
(10,138
)
 
$
20,843

 
$
563,393

Non-cash, stock-based compensation

 

 

 

 
11,834

 

 

 
11,834

Shares issued in connection with employee
   stock programs

 

 
830,431

 
1

 
3,604

 

 

 
3,605

Repurchase and retirement of common stock

 

 
(5,860,469
)
 
(6
)
 
(41,586
)
 

 
(57,976
)
 
(99,568
)
Tax benefit from employee stock transactions

 

 

 

 
1,825

 

 

 
1,825

Net income

 

 

 

 

 

 
41,907

 
41,907

Foreign currency translation

 

 

 

 

 
(2,395
)
 

 
(2,395
)
Balance at June 30, 2012

 

 
75,109,455

 
$
75

 
$
528,285

 
$
(12,533
)
 
$
4,774

 
$
520,601

 
See accompanying Notes to Condensed Consolidated Financial Statements


5

Table of Contents

VALUECLICK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Six-month Period
Ended June 30,
 
2012
 
2011
Cash flows from operating activities:
 

 
 

Net income
$
41,907

 
$
33,843

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
23,063

 
14,551

Non-cash, stock-based compensation
11,834

 
4,531

Provision for doubtful accounts and sales credits
1,761

 
851

Amortization of discount on note receivable
(1,203
)
 
(1,163
)
Deferred income taxes
(1,781
)
 
607

Tax benefit from stock-based awards
1,825

 
1,306

Excess tax benefit from stock-based awards
(1,927
)
 
(1,546
)
Changes in operating assets and liabilities, excluding business acquisitions
(3,819
)
 
(7,342
)
Net cash provided by operating activities
71,660

 
45,638

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from the sales of marketable securities

 
3,000

Purchases of property and equipment
(11,665
)
 
(5,127
)
Principal payments received on note receivable
2,120

 
1,824

Payments for acquisitions, net of cash acquired
(152
)
 
(68,886
)
Net cash used in investing activities
(9,697
)
 
(69,189
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from borrowings under credit agreement
70,000

 

Repayments under credit agreement
(65,000
)
 

Repurchases and retirement of common stock
(99,568
)
 
(37,706
)
Proceeds from shares issued under employee stock programs
3,605

 
5,336

Excess tax benefit from stock-based awards
1,927

 
1,546

Net cash used in financing activities
(89,036
)
 
(30,824
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(1,447
)
 
2,592

Net decrease in cash and cash equivalents
(28,520
)
 
(51,783
)
 
 
 
 
Cash and cash equivalents, beginning of period
116,676

 
194,317

Cash and cash equivalents, end of period
$
88,156

 
$
142,534

 
See accompanying Notes to Condensed Consolidated Financial Statements

6

Table of Contents

VALUECLICK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.    THE COMPANY AND BASIS OF PRESENTATION
 
Company Overview

ValueClick, Inc. and its subsidiaries (''ValueClick'' or the "Company'') offer a suite of products and services that enable marketers to advertise and sell their products and services through major digital marketing channels including online and mobile display advertising, affiliate marketing and comparison shopping. The Company also offers technology infrastructure tools and services that enable marketers to implement and manage their own online advertising across multiple channels including display, email, paid search, natural search, on-site, offline, and affiliate. The broad range of products and services that the Company provides enables its customers to address all aspects of their online marketing process, from strategic planning through execution, including results measurement and campaign refinements.

In periods prior to the second quarter of 2012, the Company derived its revenue from four business segments: Affiliate Marketing, Media, Owned & Operated Websites, and Technology. With the continued evolution of the Company's products and services (including elements of shared computing infrastructure and overlapping services), and recent changes to the Company's internal reporting structure, the Company reassessed its operating and reportable segments in the second quarter of 2012 and determined that the Company's Mediaplex business, which previously comprised the Technology segment, no longer meets the definition of an operating segment. The Company's Mediaplex business is now included in the Media operating segment. With this change, the Company now operates in three business segments: Affiliate Marketing, Media and Owned & Operated Websites. All prior period segment information herein has been recast to conform to this presentation.

AFFILIATE MARKETING - ValueClick's Affiliate Marketing segment, which operates under the ''Commission Junction'' brand name, provides the technology, network and customer service that, in combination, enable advertisers to create their own fully-commissioned online sales force comprised of third-party website publishers, also known as affiliates. Advertisers that utilize the Commission Junction platform generally are only obligated to pay affiliates when the affiliate delivers a consumer who achieves the desired result, which is typically a closed e-commerce transaction or a new customer lead. By joining the Commission Junction network, advertisers gain access to: a) the Company's proprietary technology platform that has been developed over the past decade and is completely focused on the unique needs of the affiliate marketing channel; b) a proprietary network of tens of thousands of high-quality website publishers; and c) the Company's digital marketing expertise and campaign management teams who ensure advertisers' campaigns are optimized for maximum performance. Commission Junction's revenues are driven primarily by variable compensation that is generally based on either a percentage of commissions paid by the Company's customers to affiliates or on a percentage of transaction revenue generated by the Company's customers from the programs managed with the Company's affiliate marketing platforms.

MEDIA - ValueClick's Media segment, which began as a leading display ad network operating primarily under the "ValueClick Media" brand name, provides a comprehensive suite of digital marketing services and tailored programs that help marketers create and increase awareness for their products and brands, attract visitors and generate leads and sales through the Internet and mobile applications. In August 2011, we acquired Dotomi, Inc. ("Dotomi"), a leading provider of data-driven, intelligent display media for major retailers, and in April 2011, we acquired Greystripe, Inc. ("Greystripe"), the largest brand-focused mobile advertising network. Also, as discussed above, beginning in the second quarter of 2012, the Media segment also includes the Company's Mediaplex business, which was previously reported as a separate business segment. Mediaplex offers technology products and services that enable marketers to implement and manage their online advertising across multiple channels including display, email, paid search, natural search, on-site, offline, and affiliate. Mediaplex is also beginning to offer media services in addition to its prior role as a technology provider.

Through these various media-focused products, the Company's Media segment is able to access its customers' target audiences through the unique combination of: its ability to acquire inventory by bidding on a real-time basis through ad exchanges and other channels; its proprietary broad-based network of thousands of high-quality online publishers; relationships with leading mobile application developers; vertically-focused networks in the areas of pharma/healthcare (AdRx Media), home and garden (Modern Living Media) and motherhood (Mom's Media); and its ability to access inventory from ValueClick's owned and operated websites, as described below. The Company's Media segment applies its proprietary data and targeting and optimization technologies to these inventory sources to ensure that the metrics that are most important to its customers are achieved. The Company's services in the Media segment are sold on a variety of pricing models, including cost-per-thousand-impression ("CPM"), cost-per-action ("CPA"), and cost-per-click ("CPC").


7


OWNED & OPERATED WEBSITES - ValueClick's Owned & Operated Websites segment services are offered through a number of branded websites, including Pricerunner, Smarter.com, Couponmountain.com, and Investopedia.com, and a limited number of content websites in key online verticals such as healthcare, finance, travel, home and garden, education, and business services.

The Pricerunner comparison shopping destination websites operate in the United Kingdom, Sweden, Germany, France, Denmark, and Austria. The Smarter.com and Couponmountain.com websites operate primarily in the United States and, to a lesser extent, Japan, Korea and China. The Pricerunner and Smarter.com websites enable consumers to research and compare products from among thousands of online and/or offline merchants using its proprietary technologies. The Company gathers product and merchant data and organizes it into comprehensive catalogs on its destination websites, along with relevant consumer and professional reviews. The Couponmountain.com website allows consumers to locate coupons and deals related to products and services that may be of interest to them. The Company's Investopedia.com website provides information on a broad range of financial and investment topics, including a proprietary dictionary of financial terms, and the Company's other vertical content websites offer consumers information and reference material across a variety of topics. The Company's services in these areas are free for consumers, and revenue is generated in one of three ways: on a CPC basis for traffic delivered to the customers' websites from listings on the Company's websites; on a CPA basis when a consumer completes a purchase or other specific event; and on a CPM basis for display advertising shown on the Company's websites.

In addition to the Company's destination websites, Search123, which operates primarily in Europe, is ValueClick's self-service paid search offering that generates its traffic primarily through syndication relationships with content websites. Search syndication revenues are driven primarily on a CPC basis.

Basis of Presentation and Use of Estimates

The condensed consolidated financial statements are unaudited and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. As permitted by the Securities and Exchange Commission (“SEC”) under Rule 10-01 of Regulation S-X, the accompanying condensed consolidated financial statements and related notes have been condensed and do not contain certain information that may be included in ValueClick's annual consolidated financial statements and notes thereto. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in ValueClick's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 , filed with the SEC on February 29, 2012 . The December 31, 2011 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including, but not limited to, those related to: i) the allowance for doubtful accounts and sales credits; ii) the fair value of the Company's debt and interest rate swap; iii) the valuation of equity instruments granted by the Company; iv) the value assigned to, recoverability and estimated useful lives of, goodwill and intangible assets acquired in business combinations; v) the Company's income tax expense, its deferred tax assets and liabilities and any valuation allowances recorded against deferred tax assets; and vi) the recognition and disclosure of contingent liabilities. These estimates and assumptions are based on historical data and experience, as well as various other factors that management believes to be reasonable under the circumstances. Actual results may differ from these estimates and assumptions.
 
Cost Reclassifications and Corrections
Costs associated with payments to search engines for driving consumer traffic to the Company's owned and operated websites have historically been classified in operating expenses in the Sales and marketing expense line item. Beginning in the fourth quarter of 2011, the Company is classifying these costs in the Cost of revenue line item.
Additionally, the Company corrected the accounting classification of the amortization of developed technologies and websites acquired in business combinations by including it in Cost of revenue beginning in the fourth quarter of 2011. Amortization related to developed technologies and websites acquired in business combinations was previously recorded in operating expenses in the Amortization of intangible assets acquired in business combinations line item. All prior periods presented in the Condensed Consolidated Statements of Comprehensive Income included herein are presented using the new classifications.

8


The following table sets forth the effects of these revised classifications on affected items within the Company's previously reported Condensed Consolidated Statements of Comprehensive Income (in thousands):
 
Three-month Period Ended June 30, 2011
 
 As Previously Reported
 
Cost Reclassification
 
 Amortization Correction
 
As Adjusted
 Cost of revenue
$
40,098

 
$
13,594

 
$
2,758

 
$
56,450

 Gross profit
84,964

 
(13,594
)
 
(2,758
)
 
68,612

 Sales and marketing expense
27,868

 
(13,594
)
 

 
14,274

Amortization of intangible assets acquired in business combinations
6,147

 

 
(2,758
)
 
3,389

 
 
 
 
 
 
 
 
 
Six-month Period Ended June 30, 2011
 
 As Previously Reported
 
Cost Reclassification
 
 Amortization Correction
 
As Adjusted
 Cost of revenue
$
72,975

 
$
30,511

 
$
4,938

 
$
108,424

 Gross profit
168,598

 
(30,511
)
 
(4,938
)
 
133,149

 Sales and marketing expense
57,417

 
(30,511
)
 

 
26,906

Amortization of intangible assets acquired in business combinations
11,035

 

 
(4,938
)
 
6,097

2.    RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2012, the Financial Accounting Standards Board ("FASB") issued amendments to the goodwill and indefinite-lived intangible assets impairment guidance which provides an option for companies to not calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on qualitative assessment, that it is not more likely than not, the indefinite-lived intangible asset is impaired. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 (early adoption is permitted). The implementation of this amended accounting guidance is not expected to have a material impact on the Company's consolidated financial position and results of operations.

In September 2011, the FASB issued amendments to the goodwill impairment guidance which provides an option for companies to use a qualitative approach to test goodwill for impairment if certain conditions are met. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 (early adoption is permitted). The implementation of this amended accounting guidance is not expected to have a material impact on the Company's consolidated financial position and results of operations.

In June 2011, the FASB issued authoritative guidance related to the presentation of other comprehensive income. The guidance requires companies to present total comprehensive income, the components of net income and the components of other comprehensive income in a single continuous statement or two separate but consecutive statements. This guidance eliminates the current option to report other comprehensive income and its components in the statement of stockholders' equity. This standard is effective for interim and annual periods beginning after December 15, 2011 (early adoption is permitted) and requires retrospective application. Also, in December 2011, the FASB indefinitely deferred the requirement for entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. The Company early adopted the presentation requirement of other comprehensive income for the year ended December 31, 2011. In June 2012, the FASB decided not to reinstate the previously deferred presentation and disclosure requirements for reclassification adjustments from other comprehensive income to net income. As an alternative, the FASB decided to issue a proposal that would require an entity to provide enhanced footnote disclosures to explain the effect of reclassification adjustments on other comprehensive income by component. In addition, an entity would be required to provide a tabular disclosure in the footnotes showing the effect of items reclassified from accumulated other comprehensive income on the line items of net income. The Company will continue to monitor the FASB’s activities related to the proposed guidance.

In May 2011, the FASB issued new accounting guidance that amends some fair value measurement principles and disclosure requirements. The new guidance states that the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets and prohibits the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. The Company adopted this accounting standard upon its effective date for periods ending on or after December 15, 2011. The adoption of this guidance did not have a material impact on the Company's consolidated financial position or results of operations.

9


3.    STOCK-BASED COMPENSATION
 In the three-month periods ended June 30, 2012 and 2011 , the Company recognized stock-based compensation of $5.7 million and $2.6 million , respectively. In the six-month periods ended June 30, 2012 and 2011 , the Company recognized stock-based compensation of $11.8 million and $4.5 million , respectively.
The increases in stock-based compensation for the three - and six -month periods ended June 30, 2012 from the prior year periods were primarily due to assumed equity awards from the Dotomi and Greystripe acquisitions and new equity grants to current employees. The following table summarizes, by statement of comprehensive income line item, the impact of stock-based compensation and the related income tax benefits recognized in the three - and six -month periods ended June 30, 2012 and 2011 (in thousands):
 
Three-month Period
Ended June 30,
 
Six-month Period
Ended June 30,
 
2012
 
2011
 
2012
 
2011
Sales and marketing
$
942

 
$
533

 
$
2,596

 
$
819

General and administrative
3,220

 
1,676

 
6,246

 
3,089

Technology
1,586

 
405

 
2,992

 
623

Stock-based compensation
5,748

 
2,614

 
11,834

 
4,531

Related income tax benefits
(1,490
)
 
(890
)
 
(3,213
)
 
(1,661
)
Stock-based compensation, net of tax benefits
$
4,258

 
$
1,724

 
$
8,621

 
$
2,870


4.    RECENT BUSINESS COMBINATIONS
Dotomi. On August 31, 2011, the Company completed the acquisition of Dotomi, a leading provider of data-driven, intelligent display media for major retailers. Under the terms of the agreement, the Company acquired all outstanding equity interests in Dotomi for total consideration of $288.1 million , consisting of cash consideration of $171.8 million , 7.1 million shares of the Company's stock valued at $109.4 million , and approximately 0.5 million shares of fully vested stock options assumed valued at $6.9 million . In addition, ValueClick assumed approximately 0.4 million unvested shares of restricted stock and 0.5 million unvested options to purchase shares of ValueClick common stock. The fair value of the assumed unvested restricted stock and options is being expensed in periods subsequent to the acquisition date. The Company incurred $0.4 million in transaction costs in the three-month period ended September 30, 2011, which is recorded in the "General and administrative expense" caption in the accompanying Condensed Consolidated Statements of Comprehensive Income.
Dotomi provides the Company with a unique set of data-driven targeting capabilities combined with expertise in brand strategy and creative development. These factors contributed to a purchase price in excess of the fair value of Dotomi's net tangible and intangible assets acquired, and, as a result, the Company has recorded goodwill in connection with this transaction. The results of Dotomi's operations are included in the Company's consolidated financial statements beginning on August 31, 2011.
The preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values, and the useful lives, in years, assigned to intangible assets, is as follows (in thousands):
Cash
 
$
23,624

Accounts receivable and other assets
 
12,659

Deferred tax assets
 
5,856

Property and equipment
 
4,452

 
Useful life
 
Amortizable intangible assets:
 
 
   Customer, affiliate and advertiser relationships
5
56,860

   Developed technologies and websites
4
19,880

   Trademarks, trade names and domain names
5
3,570

   Covenants not to compete
1
2,150

Goodwill
 
206,180

   Total assets acquired
 
335,231

Deferred tax liability
 
(38,505
)
Income taxes payable
 
(1,393
)
Other liabilities assumed
 
(7,210
)
   Total
 
$
288,123


10


The identifiable intangible assets, goodwill and deferred income taxes resulting from this acquisition are based upon preliminary valuation assumptions and may change based on final analysis. Any such change may result in reclassification between identifiable intangible assets, goodwill and deferred income taxes. The Company does not expect any goodwill to be tax deductible. Goodwill resulting from this acquisition is currently assigned to the Dotomi reporting unit within the Media segment. As the Company finalizes the integration of the Dotomi business, it will assess whether any changes are needed to this classification.

Greystripe, Inc. On April 21, 2011, the Company completed the acquisition of Greystripe, a brand-focused mobile advertising network. Under the terms of the agreement, the Company acquired all outstanding equity interests in Greystripe for cash consideration of $70.6 million .

Greystripe provides the Company with immediate scale in the U.S. mobile advertising market. This factor contributed to a purchase price in excess of the fair value of Greystripe's net tangible and intangible assets acquired, and, as a result, the Company has recorded goodwill in connection with this transaction. The results of Greystripe's operations are included in the Company's consolidated financial statements beginning on April 21, 2011.

The final allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values, and the useful lives, in years, assigned to intangible assets, is a follows (in thousands):

Cash
 
$
1,871

Accounts receivable and other assets
 
3,450

Deferred tax assets
 
8,703

Property and equipment
 
110

 
Useful life
 
Amortizable intangible assets:
 
 
   Customer, affiliate and advertiser relationships
5

10,150

   Developed technologies and websites
4

11,890

   Trademarks, trade names and domain names
4

340

   Covenants not to compete
1.5

1,920

Goodwill
 
45,409

   Total assets acquired
 
83,843

Deferred tax liability
 
(9,634
)
Other liabilities assumed
 
(3,579
)
   Total
 
$
70,630


The Company does not expect any goodwill from the Greystripe acquisition to be tax deductible.

5.    NOTE RECEIVABLE
 
The Company sold its Web Clients subsidiary on February 1, 2010. The net proceeds from the sale of approximately $32.8 million consisted of the estimated discounted fair value of a $45.0 million (face amount) five-year note receivable bearing interest at the rate of five percent, with monthly payments amortized over a ten year period and a balloon payment at the end of the fifth year. The note is collateralized by substantially all of the assets of the buyer, consisting of Web Clients and other unrelated businesses. The collateralization of Web Clients resulted in the identification of Web Clients as a variable interest entity. However, because the Company does not have the power to direct the day-to-day operations of Web Clients and the risk of loss is limited to the amount of the note receivable, the Company is not considered the primary beneficiary and is not required to consolidate this variable interest entity. Other than the note receivable, the Company has not, nor does it intend to, provide financial or other support to Web Clients.
 

11


The following table details the composition of the note receivable at June 30, 2012 and December 31, 2011 (in thousands): 
 
June 30, 2012
 
December 31, 2011
Note receivable, gross
$
36,534

 
$
38,654

Discount
(6,184
)
 
(7,387
)
Note receivable, net of discount
30,350

 
31,267

Less: current portion
(1,700
)
 
(1,567
)
Note receivable, less current portion
$
28,650

 
$
29,700

 
The Company classifies the portion of the note receivable due within one year as current assets in the caption Prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets. The total long-term portion of the note receivable as of June 30, 2012 is classified separately on the Condensed Consolidated Balance Sheets. Through the Company's review of the buyer's financial statements and its history of on-time payments, the Company determined that as of June 30, 2012 and December 31, 2011 , an allowance for credit loss was not required. The Company reflects interest income associated with this note in the Interest and other income, net caption in the accompanying Condensed Consolidated Statements of Comprehensive Income. Total interest income related to this note was $1.1 million for the three -month periods ended June 30, 2012 and 2011 . Total interest income related to this note was $2.1 million and $2.2 million for the six -month periods ended June 30, 2012 and 2011 , respectively.

6.    GOODWILL AND INTANGIBLE ASSETS
 
In conjunction with the changes in the Company's operating segments as described in Note 1, the Company reassessed its reporting units and determined that its Technology business, which has no goodwill associated with it, no longer qualifies as a reporting unit. As of June 30, 2012, the Company's reporting units consisted of the Affiliate Marketing, Dotomi, Media, and Owned & Operated Websites operating segments.

The changes in the carrying amount of goodwill, by reporting unit, for the six -month period ended June 30, 2012 were as follows (in thousands): 
 
Affiliate
Marketing
 
Dotomi
 
Media
 
Owned &
Operated
Websites
 
Total
Balance at December 31, 2011
$
30,363

 
207,746

 
$
152,369

 
$
46,555

 
$
437,033

Foreign currency translation adjustments
(103
)
 

 
(43
)
 
(382
)
 
(528
)
Purchase price allocation adjustments

 
(1,566
)
 
(1,089
)
 

 
(2,655
)
Balance at June 30, 2012
$
30,260

 
$
206,180

 
$
151,237

 
$
46,173

 
$
433,850


Goodwill, accumulated impairment losses and the net carrying amount of goodwill, by reporting unit, as of June 30, 2012 and December 31, 2011 were as follows (in thousands): 
 
Affiliate
Marketing
 
Dotomi
 
Media
 
Owned &
Operated
Websites
 
Total
June 30, 2012
 
 
 
 
 
 
 
 
 
Goodwill
$
30,260

 
$
206,180

 
$
263,237

 
$
256,173

 
$
755,850

Accumulated impairment losses

 

 
(112,000
)
 
(210,000
)
 
(322,000
)
Goodwill, net
$
30,260

 
$
206,180

 
$
151,237

 
$
46,173

 
$
433,850

 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
 
 
 
 
Goodwill
$
30,363

 
$
207,746

 
$
264,369

 
$
256,555

 
$
759,033

Accumulated impairment losses

 

 
(112,000
)
 
(210,000
)
 
(322,000
)
Goodwill, net
$
30,363

 
$
207,746

 
$
152,369

 
$
46,555

 
$
437,033


    

12


The gross balance, accumulated amortization and net carrying amount of the Company’s intangible assets as of June 30, 2012 and December 31, 2011 were as follows (in thousands): 
 
Gross
Balance
 
Accumulated
Amortization
 
Net Carrying
Amount
June 30, 2012
 

 
 

 
 

Customer, affiliate and advertiser relationships
$
107,490

 
$
(50,975
)
 
$
56,515

Trademarks, trade names and domain names
33,490

 
(22,339
)
 
11,151

Developed technologies and websites
66,070

 
(38,231
)
 
27,839

Covenants not to compete
4,070

 
(3,317
)
 
753

Total intangible assets
$
211,120

 
$
(114,862
)
 
$
96,258

 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
Customer, affiliate and advertiser relationships
$
107,686

 
$
(42,238
)
 
$
65,448

Trademarks, trade names and domain names
33,583

 
(20,340
)
 
13,243

Developed technologies and websites
66,125

 
(33,277
)
 
32,848

Covenants not to compete
4,070

 
(1,602
)
 
2,468

Total intangible assets
$
211,464

 
$
(97,457
)
 
$
114,007

 
For the six -month period ended June 30, 2012 , the decrease in the gross intangible assets balance was due to foreign currency translation adjustments of $0.3 million .

The following table summarizes, by consolidated statement of comprehensive income line item, the impact of amortization expense recognized for the three - and six -month periods ended June 30, 2012 and 2011 (in thousands):
 
 
Three-month Period
Ended June 30,
 
Six-month Period
Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Amortization of acquired developed technologies and websites included in consolidated cost of revenue
 
$
2,492

 
$
2,758

 
$
4,985

 
$
4,938

Amortization of acquired intangible assets included in consolidated operating expenses
 
6,321

 
3,389

 
12,645

 
6,097

Total
 
$
8,813

 
$
6,147

 
$
17,630

 
$
11,035


Estimated intangible asset amortization expense for the remainder of 2012, the succeeding five years and thereafter, is as follows (in thousands):
 
 
Amortization included in:
 
 
Cost of revenue
 
Operating expenses
 
Total
Six months ending December 31, 2012
 
$
4,975

 
$
9,764

 
$
14,739

2013
 
9,333

 
15,499

 
24,832

2014
 
8,468

 
15,299

 
23,767

2015
 
4,756

 
15,240

 
19,996

2016
 
307

 
9,781

 
10,088

Thereafter
 

 
2,836

 
2,836


7.    ACCOUNTS RECEIVABLE
 
Accounts receivable are stated net of an allowance for doubtful accounts and sales credits of $5.2 million at June 30, 2012 and $4.7 million at December 31, 2011 . No customers accounted for more than 10% of the accounts receivable balance at June 30, 2012 or December 31, 2011 .
 

13


8.    PROPERTY AND EQUIPMENT
 
Property and equipment consisted of the following at June 30, 2012 and December 31, 2011 (in thousands):
 
June 30, 2012
 
December 31, 2011
Computer equipment and purchased software
$
55,166

 
$
44,673

Furniture and equipment
5,264

 
4,924

Leasehold improvements
3,727

 
3,400

Property and equipment, gross
64,157

 
52,997

Less: accumulated depreciation and leasehold amortization
(38,012
)
 
(33,045
)
Total property and equipment, net
$
26,145

 
$
19,952

 
9.    FAIR VALUE MEASUREMENT
 
The accounting guidance for fair value measurements defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. This accounting guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, this accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as fair value measured based on observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as fair value measured based on observable inputs other than the quoted prices included within Level 1 that are observable, either directly or indirectly; and Level 3, defined as fair value measured based on unobservable inputs for which there is little or no market data, therefore requiring the reporting entity to develop its own assumptions. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
As of June 30, 2012 and December 31, 2011 , the Company's financial instruments required to be measured at fair value consist of cash equivalents, net accounts receivable, accounts payable and accrued expenses, and debt. The carrying value of the cash equivalents, which consist of money market funds measured using level 1 inputs, net accounts receivable and accounts payable and accrued expenses are reasonable estimates of their fair value because of their short-term nature. The carrying value of the Company's debt approximates its fair value based on Level 2 inputs, and after consideration of default and credit risk.
10.    COMMITMENTS AND CONTINGENCIES
 
In March 2012, the Company entered into a new facility lease in Chicago that will increase its total future minimum lease commitments over the next ten years, beginning in July 2012 , by $16.2 million .

From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. The Company is not currently a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that is reasonably possible to have a material adverse effect on the Company's business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.

11.    INCOME TAXES
 
As of December 31, 2011 , the Company had recorded a liability of $16.9 million for unrecognized tax benefits. During the three -month period ended June 30, 2012 , the Company’s liability for unrecognized tax benefits increased by $0.3 million as a result of income tax positions taken during the period. During the six -month period ended June 30, 2012 , the Company's liability for unrecognized tax benefits increased by $0.6 million as a result of income tax positions taken during the period, decreased by $0.2 million as a result of settlement, and decreased by $0.5 million as a result of expiration of certain statutes of limitations, resulting in a total liability for unrecognized tax benefits at June 30, 2012 of $16.8 million . If recognized in future periods, this liability for unrecognized tax benefits would be recorded as a reduction to income tax expense. Facts and circumstances could arise in the twelve-month period following June 30, 2012 that could cause the Company to reduce the liability for unrecognized tax benefits, including, but not limited to, settlement of income tax positions or expiration of the statutes of limitations. Because the ultimate resolution of uncertain tax positions depends on many factors and assumptions, the Company is not able to estimate the range of potential changes in the liability for unrecognized tax benefits or the timing of

14


such changes.
 
The Company’s policy is to recognize interest and penalties expense, if any, related to unrecognized tax benefits as a component of income tax expense. The Company recognized $0.3 million and $0.4 million in gross interest and penalties expense related to unrecognized tax benefits in the three -month periods ended June 30, 2012 and 2011 , respectively. During the six -month periods ended June 30, 2012 and 2011 , the Company recognized $0.6 million and $0.7 million , respectively, in gross interest and penalties, offset by a reversal of prior accrued interest and penalties of $0.4 million as a result of the expiration of certain statutes of limitations during the six -month period ended June 30, 2012 . The Company had an accrual for interest and penalties in the amount of $8.0 million and $7.8 million at June 30, 2012 and December 31, 2011 , respectively, related to unrecognized tax benefits. These amounts are included in non-current income taxes payable.
 
The Company’s uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities. These include the 2008 through 2011 tax years for federal purposes, 1999 and 2004 through 2011 tax years for various state jurisdictions, and 2004 through 2011 tax years for various foreign jurisdictions. The Company is currently under Internal Revenue Service audit examination for the 2007 tax year, as well as various state and foreign jurisdictions for various tax years.
 
12.    STOCKHOLDERS’ EQUITY
 
In September 2001, the Company’s board of directors authorized a stock repurchase program (the “Program”) to allow for the repurchase of shares of the Company’s common stock at prevailing market prices in the open market or through unsolicited negotiated transactions.  Since the inception of the Program and through December 31, 2011 , the Company’s board of directors authorized a total of $633.3 million for repurchases under the Program and the Company had repurchased a total of 64.4 million shares of its common stock for approximately $592.5 million . During the three - and six -month periods ended June 30, 2012 , the Company's board of directors authorized $100.0 million and $159.2 million , respectively, for additional repurchases under the Program. During the three - and six -month periods ended June 30, 2012 , the Company repurchased 5.9 million shares for $99.5 million . As of June 30, 2012 , up to an additional $100.5 million of the Company’s capital may be used to repurchase shares of the Company’s outstanding common stock under the Program.
 
Repurchases have been funded from available working capital and borrowings under the Company's credit facility, and all shares have been retired subsequent to their repurchase. There is no guarantee as to the exact number of shares that will be repurchased by the Company, and the Company may discontinue repurchases at any time that management or the Company’s board of directors determines additional repurchases are not warranted. The amounts authorized by the Company’s board of directors exclude broker commissions.

13.    NET INCOME PER COMMON SHARE
 
The following table sets forth the computation of basic and diluted net income per common share for the periods indicated (in thousands, except per share data): 
 
Three-month Period
Ended June 30,
 
Six-month Period
Ended June 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
20,336

 
$
16,981

 
$
41,907

 
$
33,843

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - basic
78,720

 
78,981

 
79,529

 
79,829

Dilutive effect of stock options and employee benefit plans
1,616

 
1,078

 
1,692

 
1,018

Number of shares used to compute net income per common share - diluted
80,336

 
80,059

 
81,221

 
80,847

 
 
 
 
 
 
 
 
Net income per common share:
 

 
 

 
 
 
 
Basic
$
0.26

 
$
0.22

 
$
0.53

 
$
0.42

Diluted
$
0.25

 
$
0.21

 
$
0.52

 
$
0.42

Employee stock-based awards totaling 144,000 shares and 429,000 shares during the three -month periods ended June 30, 2012 and 2011 , respectively, were excluded from the computation of diluted net income per common share because their effect would have been anti-dilutive under the treasury stock method. For the six -month periods ended June 30, 2012 and 2011 , the number of anti-dilutive shares excluded from the diluted net income per common share computation was 125,000 and 665,000 , respectively. 

15


14.    CREDIT AGREEMENT
 
On August 19, 2011, the Company entered into an Amended and Restated Credit Agreement (the "Credit Facility"), which replaced the Company's previous line of credit. The Credit Facility originally consisted of a revolving loan commitment of $150.0 million and a term loan of $50.0 million , with a Company option to increase the total revolving loan commitment to $200.0 million subject to certain conditions. On June 29, 2012, the Company entered into a Commitment Increase Agreement to increase the total revolving loan commitment under the Credit Facility to $200.0 million . The Credit Facility expires on August 19, 2016. Borrowings under the facility bear interest at either (i) the Base Rate, which is equal to the highest of (a) the Agent's prime rate, (b) the federal funds rate plus 1.50% and (c) the one month reserve adjusted daily LIBOR rate plus 1.50% , or (ii) the London Interbank Offered Rate ("LIBOR"), in each case plus an applicable margin as in effect at each interest calculation date. The applicable margin in effect from time to time is based on the Company’s total leverage ratio. The applicable margins range from 1.25% to 2.00% for LIBOR loans and from 0.25% to 1.00% for Base Rate loans.

Certain of the Company's domestic subsidiaries have guaranteed the obligations of the Company and all future domestic subsidiaries of the Company also are required to guarantee the obligations of the Company under the Credit Facility. The Company's obligations are secured by a lien on substantially all of its present and future assets pursuant to a separate security agreement (the "Security Agreement"). In addition, the obligations of each subsidiary guarantor are secured by a lien on substantially all of such subsidiary’s present and future assets pursuant to a separate guaranty agreement (the "Guaranty Agreement"). The subsidiary guarantees and the collateral under the Security Agreement are subject to release upon fulfillment of certain conditions specified in the Credit Facility, Security Agreement and the Guaranty Agreement.
 
The Credit Facility is available to be used by the Company to, among other things, fund its working capital needs and for other general corporate purposes, including acquisitions and stock repurchases. We used borrowings under the Credit Facility to fund a portion of the Dotomi acquisition described in Note 4 and a portion of the stock repurchases described in Note 12. The Company pays a commitment fee on the unused portion of the revolving loan commitment amount up to a maximum of 0.35% based on the Company’s total leverage ratio. The agreement also contains customary events of default such as failure to pay interest or principal when due, material inaccuracy of representations or warranties, bankruptcy events, change of control, a material adverse change in financial condition or operations, or a default of covenant. Upon the occurrence of an event of default, the principal and accrued interest under the Credit Facility then outstanding may be declared due and payable. At June 30, 2012 , there was $130.0 million outstanding under the revolving loan commitment, and $42.5 million was outstanding under the term loan. The difference between the carrying amount and the fair value of the debt outstanding is not material. The term loan requires payments of $2.5 million per quarter on the last day of each calendar quarter.

Term loan maturities on a calendar year basis are as follows (in thousands):
 
Remainder of 2012
 
2013
 
2014
 
2015
 
2016
Contractual debt obligation maturities
$
5,000

 
$
10,000

 
$
10,000

 
$
10,000

 
$
7,500

 
The Company has provided various representations and agreed to certain financial covenants including a total leverage ratio, minimum trailing-twelve month EBITDA (defined as earnings before interest income, income taxes, depreciation, amortization, stock-based compensation, and certain other non-cash or non-recurring income or expenses) of $100 million through September 2012 and $125 million thereafter, and minimum unrestricted, unencumbered liquid asset requirements. At June 30, 2012 and December 31, 2011 , the Company was in compliance with all of the financial covenants of the Credit Facility.

In conjunction with the term loan borrowing under the Credit Facility, the Company entered into an interest rate swap agreement to limit its exposure to fluctuations in interest rates and fix the interest payments on the term loan. The terms of the swap, including the notional amount, term and amortization schedule, match the critical terms of the term loan. Under the swap agreement, the Company pays a fixed rate of 0.91% and receives one-month LIBOR, which is the benchmark interest rate on the variable rate term loan. The fair value of the swap at June 30, 2012 and December 31, 2011 , and its impact on interest expense for the quarter then ended is immaterial to the Company's consolidated financial statements.
 

16


15.    SEGMENTS, GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
 
The Company derives its revenue from three business segments. These business segments are presented on a worldwide basis and include: Affiliate Marketing, Media and Owned & Operated Websites. In the second quarter of 2012, the Company changed its internal reporting structure which resulted in changes in the Company's operating segments. The Company's Mediaplex business (which previously comprised the Technology segment) was combined with the Media segment to reflect the manner in which management assesses the performance of these businesses and makes resource allocation decisions. All prior period segment information has been revised to conform to the new segment presentation.

The following table provides revenue and segment income from operations for each of the Company’s three business segments. Segment income from operations, as shown below, is the performance measure used by management to assess segment performance and excludes the effects of stock-based compensation, amortization of intangible assets and corporate expenses. Corporate expenses consist of those costs not directly attributable to a business segment, and include: salaries and benefits for the Company’s executive, finance, legal, corporate governance, human resources, and facilities organizations; fees for professional service providers including audit, tax, Sarbanes-Oxley compliance; acquisition related costs; certain legal fees not directly attributable to a business segment; liability insurance; and, other corporate expenses. 
 
Revenue
 
Segment Income
from Operations
 
Three-month Period Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
Affiliate Marketing
$
33,605

 
$
32,616

 
$
19,694

 
$
19,116

Media
91,088

 
52,008

 
25,121

 
13,738

Owned & Operated Websites
36,398

 
40,554

 
8,688

 
8,895

Inter-segment revenue
(109
)
 
(116
)
 

 

Total
$
160,982

 
$
125,062

 
$
53,503

 
$
41,749

 
 
 
 
 
 
 
 
 
Revenue
 
Segment Income
from Continuing Operations
 
Six-month Period Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
Affiliate Marketing
$
70,712

 
$
67,090

 
$
42,632

 
$
39,605

Media
171,837

 
96,233

 
47,525

 
25,715

Owned & Operated Websites
71,493

 
78,501

 
15,590

 
15,942

Inter-segment revenue
(208
)
 
(251
)
 

 

Total
$
313,834

 
$
241,573

 
$
105,747

 
$
81,262

 
A reconciliation of total segment income from operations to consolidated income from operations is as follows for each period (in thousands): 
 
Three-month Period
Ended June 30,
 
Six-month Period
Ended June 30,
 
2012
 
2011
 
2012
 
2011
Segment income from operations
$
53,503

 
$
41,749

 
$
105,747

 
$
81,262

Corporate expenses
(6,841
)
 
(6,454
)
 
(13,769
)
 
(12,654
)
Stock-based compensation
(5,748
)
 
(2,614
)
 
(11,834
)
 
(4,531
)
Amortization of acquired developed technology and websites included in consolidated cost of revenue
(2,492
)
 
(2,758
)
 
(4,985
)
 
(4,938
)
Amortization of acquired intangible assets included in consolidated operating expenses
(6,321
)
 
(3,389
)
 
(12,645
)
 
(6,097
)
Consolidated income from operations
$
32,101

 
$
26,534

 
$
62,514

 
$
53,042



17


Depreciation and leasehold amortization expense included in the determination of segment income from operations as presented above for the Affiliate Marketing, Media and Owned & Operated Websites segments is as follows for each period (in thousands):
 
Three-month Period
Ended June 30,
 
Six-month Period
Ended June 30,
 
2012
 
2011
 
2012
 
2011
Affiliate Marketing
$
320

 
$
288

 
$
615

 
$
540

Media
2,042

 
953

 
3,914

 
1,897

Owned & Operated Websites
347

 
456

 
728

 
899

Corporate
94

 
65

 
176

 
180

Total
$
2,803

 
$
1,762

 
$
5,433

 
$
3,516

 
The Company’s operations are domiciled in the United States with operations internationally in Europe, Canada, South Africa, Korea, China, and Japan through wholly-owned subsidiaries. Revenue is attributed to a geographic region based upon the country from which the customer relationship is maintained. The Company’s operations in Canada and China primarily support the revenue generated in the United States and, therefore, the costs associated with these operations are attributed to the United States in the determination of geographic income from operations shown below.
 
The Company’s geographic information was as follows (in thousands): 
 
Revenue
 
Three-month Period
Ended June 30,
 
Six-month Period
Ended June 30,
 
2012
 
2011
 
2012
 
2011
United States
$
135,425

 
$
98,107

 
$
262,436

 
$
189,005

United Kingdom
13,915

 
14,661

 
28,138

 
29,376

Other countries
13,261

 
13,770

 
26,345

 
26,079

Inter-regional eliminations
(1,619
)
 
(1,476
)
 
(3,085
)
 
(2,887
)
Total
$
160,982

 
$
125,062

 
$
313,834

 
$
241,573

 
 
 
 
 
 
 
 
 
Income from Operations
 
Three-month Period
Ended June 30,
 
Six-month Period
Ended June 30,
 
2012
 
2011
 
2012
 
2011
United States
$
26,688

 
$
20,757

 
$
52,258

 
$
41,325

United Kingdom
2,926

 
3,645

 
5,536

 
7,329

Other countries
2,487

 
2,132

 
4,720

 
4,388

Total
$
32,101

 
$
26,534

 
$
62,514

 
$
53,042

 
For the three -month periods ended June 30, 2012 and 2011 , one customer, Google, accounted for approximately 11.3% and 17.2% , respectively, of total revenue. For the six -month periods ended June 30, 2012 and 2011 , one customer, Google, accounted for approximately 11.2% and 16.6% , respectively, of total revenue. Revenue from Google is recognized entirely in the Company's Owned & Operated Websites segment.
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
CAUTIONARY STATEMENT
 
This report contains forward-looking statements based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The section entitled “Risk Factors” in this Form 10-Q and similar discussions

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in our Annual Report on Form 10-K for the year ended December 31, 2011 , and in our other SEC filings, discuss some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this report, and in our other filings with the SEC, before deciding to invest in our company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. The information contained in this Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that discuss our business in greater detail and advise interested parties of certain risks, uncertainties and other factors that may affect our business, results of operations or financial condition.

OVERVIEW
 
ValueClick, Inc. and its subsidiaries (collectively "ValueClick" or the "Company" or in the first person, "we", "us" and "our") is one of the world's largest and most comprehensive digital marketing services companies. We offer a suite of products and services that enable marketers to engage with their current and potential customers online and through mobile devices to increase brand awareness and generate leads and sales. We also offer technology infrastructure tools and services that enable marketers to implement and manage their online advertising across multiple channels including display, email, paid search, natural search, on-site, offline, and affiliate. The broad range of products and services that we provide enables our customers to address all aspects of the digital marketing process, including strategic planning, ad creation and optimization, media sourcing, and sophisticated reporting and analytics.
 
Our customers are primarily direct marketers, brand advertisers and the advertising agencies that service these groups. The proposition we offer our customers includes: one of the industry's broadest online marketing services portfolios—including performance-based campaigns and programs where marketers only pay for advertising when it generates a customer lead or product sale; our ability to target campaigns to reach the online consumers our customers are most interested in; and the scale at which we can deliver results for online advertising campaigns.
 
We generate the audiences for our advertisers' campaigns through a unique combination of: proprietary networks of third-party websites, ad exchanges, ad network optimization providers, spot buys with large publishers, search engines, and websites that we own and operate in several key verticals. Our sophisticated data management platform harnesses the large amount of anonymous data that is generated by our businesses, and we utilize this data, along with our technology platforms and marketing expertise, to deliver measurable performance for our customers.

Our publisher partners enjoy efficient and effective monetization of their online advertising inventory through representation by our direct sales teams in major U.S. and European media markets, participation in large-scale advertiser and advertising agency campaigns they may not have access to on their own, enhanced monetization through our proprietary campaign optimization and targeting technology, and settlement services to facilitate payments to publishers for the online inventory utilized by the advertisers. As we do not primarily compete directly with our publisher partners for online consumers, we act as a trusted partner in helping online publishers monetize their online audience and advertising inventory.

We believe that the effectiveness of our online marketing services is dependent on the quality of our networks and our publisher partner relationships. As such, we have established stringent quality standards that include publisher rejection from our networks due to inappropriate content, illegal activity and fraudulent clicking activity, among other criteria. We enforce these quality standards using a combination of manual and automated auditing processes that continually monitor and review both website content and adherence to advertiser campaign specifications.

In previous reporting periods, we reported four business segments: Affiliate Marketing, Media, Owned & Operated Websites, and Technology. However, with the continued evolution of our products and services (including elements of shared computing infrastructure and overlapping services) and recent changes to our internal reporting structure, we reassessed our operating and reportable segments in the second quarter of 2012. We determined that our Mediaplex business, which previously comprised the Technology segment, no longer meets the definition of an operating segment. As such, our Mediaplex business is now included in the Media operating segment. With this change, we now derive our revenue from three business segments: Affiliate Marketing, Media and Owned & Operated Websites, which are described in more detail below. All prior period segment information contained herein has been recast to conform to this presentation.

AFFILIATE MARKETING

ValueClick's Affiliate Marketing segment, which operates under the "Commission Junction" brand name, provides the technology, network and customer service that, in combination, enable advertisers to create their own fully-commissioned

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online sales force comprised of third-party website publishers, also known as affiliates. Advertisers that utilize the Commission Junction platform generally are only obligated to pay affiliates when the affiliate delivers a consumer who achieves the desired result, which is typically a closed e-commerce transaction or a new customer lead. By joining the Commission Junction network, advertisers gain access to: a) the Company's proprietary technology platform that has been developed over the past decade and is completely focused on the unique needs of the affiliate marketing channel; b) a proprietary network of tens of thousands of high-quality website publishers; and c) the Company's digital marketing expertise and campaign management teams who ensure advertisers' campaigns are optimized for maximum performance. Commission Junction's revenues are driven primarily by variable compensation that is generally based on either a percentage of commissions paid by the Company's customers to affiliates or on a percentage of transaction revenue generated by the Company's customers from the programs managed with the Company's affiliate marketing platforms.

MEDIA

ValueClick's Media segment, which began as a leading display ad network operating primarily under the "ValueClick Media" brand name, provides a comprehensive suite of digital marketing services and tailored programs that help marketers create and increase awareness for their products and brands, attract visitors and generate leads and sales through the Internet and mobile applications. In August 2011, we acquired Dotomi, Inc. ("Dotomi"), a leading provider of data-driven, intelligent display media for major retailers, and in April 2011, we acquired Greystripe, Inc. ("Greystripe"), the largest brand-focused mobile advertising network. Also, as discussed above, beginning in the second quarter of 2012, the Media segment also includes our Mediaplex business, which was previously reported as a separate business segment. Mediaplex offers technology products and services that enable marketers to implement and manage their online advertising across multiple channels including display, email, paid search, natural search, on-site, offline, and affiliate. Mediaplex is also beginning to offer media services in addition to its prior role as a technology provider.

Through these various media-focused products, our Media segment is able to access its customers' target audiences through the unique combination of: its ability to acquire inventory by bidding on a real-time basis through ad exchanges and other channels; its proprietary broad-based network of thousands of high-quality online publishers; relationships with leading mobile application developers; vertically-focused networks in the areas of pharma/healthcare (AdRx Media), home and garden (Modern Living Media) and motherhood (Mom's Media); and its ability to access inventory from ValueClick's owned and operated websites, as described below. Our Media segment applies its proprietary data and targeting and optimization technologies to these inventory sources to ensure that the metrics that are most important to its customers are achieved. Our services in the Media segment are sold on a variety of pricing models, including cost-per-thousand-impression ("CPM"), cost-per-action ("CPA"), and cost-per-click ("CPC").

OWNED & OPERATED WEBSITES

ValueClick's Owned & Operated Websites segment services are offered through a number of branded websites, including Pricerunner, Smarter.com, Couponmountain.com, and Investopedia.com, and a limited number of content websites in key online verticals such as healthcare, finance, travel, home and garden, education, and business services.

The Pricerunner comparison shopping destination websites operate in the United Kingdom, Sweden, Germany, France, Denmark, and Austria. The Smarter.com and Couponmountain.com websites operate primarily in the United States and, to a lesser extent, Japan, Korea and China. The Pricerunner and Smarter.com websites enable consumers to research and compare products from among thousands of online and/or offline merchants using its proprietary technologies. The Company gathers product and merchant data and organizes it into comprehensive catalogs on its destination websites, along with relevant consumer and professional reviews. The Couponmountain.com website allows consumers to locate coupons and deals related to products and services that may be of interest to them. The Company's Investopedia.com website, which the Company acquired in August 2010, provides information on a broad range of financial and investment topics, including a proprietary dictionary of financial terms, and the Company's other vertical content websites offer consumers information and reference material across a variety of topics. The Company's services in these areas are free for consumers, and revenue is generated in one of three ways: on a CPC basis for traffic delivered to the customers' websites from listings on the Company's websites; on a CPA basis when a consumer completes a purchase or other specific event; and on a CPM basis for display advertising shown on the Company's websites.

In addition to the Company's destination websites, Search123, which operates primarily in Europe, is ValueClick's self-service paid search offering that generates its traffic primarily through syndication relationships with content websites. Search syndication revenues are driven primarily on a CPC basis.



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SEGMENT OPERATING RESULTS
The following table provides revenue, cost of revenue, gross profit, operating expenses, and income from operations information for each of our three business segments. Segment income from operations, as shown below, is the performance measure used by management to assess segment performance and excludes the effects of: stock-based compensation, amortization of intangible assets and corporate expenses. Corporate expenses consist of those costs not directly attributable to a business segment, and include: salaries and benefits for our executive, finance, legal, corporate governance, human resources, and facilities organizations; fees for professional service providers including audit, tax, Sarbanes-Oxley compliance, acquisition related costs, and certain legal matters; insurance; and, other corporate expenses. A reconciliation of segment income from operations to consolidated income from operations and a reconciliation of segment revenue to consolidated revenue are also provided in the following table.
 
Three-month Period
Ended June 30,
 
Six-month Period
Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
Affiliate Marketing
 

 
 

 
 
 
 
Revenue
$
33,605

 
$
32,616

 
$
70,712

 
$
67,090

Cost of revenue
4,200

 
4,314

 
8,376

 
8,638

Gross profit
29,405

 
28,302

 
62,336

 
58,452

Operating expenses
9,711

 
9,186

 
19,704

 
18,847

Segment income from operations
$
19,694

 
$
19,116

 
$
42,632

 
$
39,605

 
 
 
 
 
 
 
 
Media
 

 
 

 
 
 
 
Revenue
$
91,088

 
$
52,008

 
$
171,837

 
$
96,233

Cost of revenue
36,888

 
23,907

 
67,491

 
44,482

Gross profit
54,200

 
28,101

 
104,346

 
51,751

Operating expenses
29,079

 
14,363

 
56,821

 
26,036

Segment income from operations
$
25,121

 
$
13,738

 
$
47,525

 
$
25,715

 
 
 
 
 
 
 
 
Owned & Operated Websites
 

 
 

 
 
 
 
Revenue
$
36,398

 
$
40,554

 
$
71,493

 
$
78,501

Cost of revenue
21,349

 
25,548

 
43,082

 
50,540

Gross profit
15,049

 
15,006

 
28,411

 
27,961

Operating expenses
6,361

 
6,111

 
12,821

 
12,019

Segment income from operations
$
8,688

 
$
8,895

 
$
15,590

 
$
15,942

 
 
 
 
 
 
 
 
Reconciliation of segment income from operations to consolidated income from operations:
 

 
 

 
 
 
 
Total segment income from operations
$
53,503

 
$
41,749

 
$
105,747

 
$
81,262

Corporate expenses
(6,841
)
 
(6,454
)
 
(13,769
)
 
(12,654
)
Stock-based compensation
(5,748
)
 
(2,614
)
 
(11,834
)
 
(4,531
)
Amortization of acquired developed technology and websites included in consolidated cost of revenue
(2,492
)
 
(2,758
)
 
(4,985
)
 
(4,938
)
Amortization of intangible assets included in consolidated operating expenses
(6,321
)
 
(3,389
)
 
(12,645
)
 
(6,097
)
Consolidated income from operations
$
32,101

 
$
26,534

 
$
62,514

 
$
53,042

 
 
 
 
 
 
 
 
Reconciliation of segment revenue to consolidated revenue:
 
 

 
 
 
 
Affiliate Marketing
$
33,605

 
$
32,616

 
$
70,712

 
$
67,090

Media
91,088

 
52,008

 
171,837

 
96,233

Owned & Operated Websites
36,398

 
40,554

 
71,493

 
78,501

Inter-segment eliminations
(109
)
 
(116
)
 
(208
)
 
(251
)
Consolidated revenue
$
160,982

 
$
125,062

 
$
313,834

 
$
241,573


RESULTS OF OPERATIONS—THREE-MONTH PERIOD ENDED JUNE 30, 2012 COMPARED TO JUNE 30, 2011
 
Revenue.    Consolidated revenue for the three-month period ended June 30, 2012 was $161.0 million compared to $125.1 million for the same period in 2011 , representing a 28.7% increase, or $35.9 million .

 Affiliate Marketing segment revenue increased to $33.6 million for the three-month period ended June 30, 2012

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compared to $32.6 million in the same period in 2011 . This increase of $1.0 million , or 3.0% , was attributable to our domestic operations and due to an increase in transaction volumes associated with existing customers and an increase in the number of customers. Domestic affiliate marketing growth was offset by a decrease in our European affiliate marketing business due to a combination of the impact of changes in foreign exchange rates as well as a weak macroeconomic environment.

Media segment revenue increased to $91.1 million for the three-month period ended June 30, 2012 compared to $52.0 million for the same period in 2011 . The increase of $39.1 million , or 75.1% , in Media segment revenue was attributable to the acquisition of Dotomi, acquired on August 31, 2011, and growth in our mobile and online display businesses, offset by a decrease in our European media business due to the impact of changes in foreign exchange rates.
 
Owned & Operated Websites segment revenue decreased to $36.4 million for the three-month period ended June 30, 2012 compared to $40.6 million in the same period in 2011 . The decrease of $4.2 million , or 10.2% , was primarily attributable to our efforts to reduce the volume of activity within the Owned & Operated Websites segment that relies on paid traffic and search monetization. Owned & Operated Websites segment revenue is concentrated with one major customer, Google. A loss of, or further reduction of revenue from, this customer could have a significant negative impact on the revenue of this segment and the Company.
 
Cost of Revenue and Gross Profit.   Cost of revenue includes payments to website publishers, payments to search engines for driving consumer traffic to our owned and operated websites, certain labor costs that are directly related to revenue-producing activities, Internet access costs, amortization of developed technology and websites acquired in business combinations, and depreciation on revenue-producing technologies.

Costs associated with payments to search engines for driving consumer traffic to our owned and operated websites were, prior to the fourth quarter of 2011, classified in operating expenses in the Sales and marketing expense line item. Beginning in the fourth quarter of 2011, we are classifying these costs in Cost of revenue . Additionally, we corrected the accounting classification of the amortization of developed technologies and websites acquired in business combinations by including it in Cost of revenue beginning in the fourth quarter of 2011. These reclassifications are more fully described in Note 1 to our condensed consolidated financial statements. Amortization related to developed technologies and websites acquired in business combinations was previously recorded in operating expenses in the Amortization of intangible assets acquired in business combinations line item. Prior periods presented in the Condensed Consolidated Statements of Comprehensive Income included herein are presented using the new classifications.
 
Our consolidated cost of revenue was $64.9 million for the three-month period ended June 30, 2012 compared to $56.5 million for the same period in 2011 , an increase of $8.4 million , or 14.9% . Our consolidated gross margin was 59.7% and 54.9% for the three-month periods ended June 30, 2012 and 2011 , respectively. Consolidated gross margin increased from the year ago period due to the improved gross margin in our Media and Owned & Operated segments as described below.
 
Cost of revenue for the Affiliate Marketing segment decreased slightly to $4.2 million for the three-month period ended June 30, 2012 compared to $4.3 million for the same period in 2011 . Our Affiliate Marketing gross margin remained relatively consistent at 87.5% for the three -month period ended June 30, 2012 compared to 86.8% for the same period in 2011 .
 
Cost of revenue for the Media segment increased $13.0 million , or 54.3% , to $36.9 million for the three-month period ended June 30, 2012 compared to $23.9 million for the same period in 2011 due to the inclusion of costs of revenue related to the Dotomi acquisition. Our Media segment gross margin increased to 59.5% for the three-month period ended June 30, 2012 compared to 54.0% for the same period in 2011 primarily due to the inclusion of Dotomi.
 
Cost of revenue for the Owned & Operated Websites segment decreased $4.2 million to $21.3 million for the three-month period ended June 30, 2012 compared to $25.5 million for the same period in 2011 . Our Owned & Operated Websites segment gross margin increased to 41.3% for the three -month period ended June 30, 2012 from 37.0% for the same period in 2011 . The increased gross margin is a result of our efforts to decrease the mix of paid traffic which generates lower gross margin than our organic (non-paid) traffic sources.
 
Operating Expenses:
 
Sales and Marketing.    Sales and marketing expenses consist primarily of compensation and employee benefits of sales and marketing and related support teams, certain advertising costs, travel, trade shows, and marketing materials. Online advertising costs (traffic acquisition costs) in our Owned & Operated segment that were previously included in sales and marketing expenses have been reclassified to cost of revenue for all periods presented, as described above.


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Total sales and marketing expenses for the three-month period ended June 30, 2012 were $20.9 million compared to $14.3 million for the same period in 2011 , an increase of $6.6 million , or 46.3% . The increase was primarily due to the acquisition of Dotomi, including the associated higher stock-based compensation as described below, and increases in salaries and wages as a result of increased headcount in our sales staff. Our sales and marketing expenses as a percentage of revenue increased to 13.0% for the three-month period ended June 30, 2012 compared to 11.4% for the same period in 2011 .
 
General and Administrative.    General and administrative expenses consist primarily of facilities costs, executive and administrative compensation and employee benefits, depreciation, professional services fees, insurance costs, bad debt expense, and other general overhead costs. General and administrative expenses increased to $19.9 million for the three-month period ended June 30, 2012 compared to $13.6 million for the same period in 2011 , an increase of $6.3 million . The increase was primarily due to the acquisition of Dotomi, including the associated higher stock-based compensation as described below. As a percentage of revenue, general and administrative expenses increased to 12.4% for the three-month period ended June 30, 2012 compared to 10.8% for the year-ago period.
 
Technology.    Technology expenses include costs associated with the maintenance and ongoing development of our technology platforms, including compensation and employee benefits for our engineering and network operations departments, as well as costs for contracted services and supplies. Technology expenses for the three-month period ended June 30, 2012 were $16.9 million , or 10.5% of revenue, compared to $10.9 million , or 8.7% of revenue, for the same period in 2011 , an increase of $6.1 million , or 55.8% . The increase in technology expenses was primarily due to the inclusion of Dotomi, including the associated higher stock-based compensation as described below.
 
Segment Income from Operations.    Affiliate Marketing segment income from operations for the three-month period ended June 30, 2012 increased 3.0% , or $0.6 million , to $19.7 million , from $19.1 million in the same period of the prior year, and represented 58.6% of Affiliate Marketing segment revenue in both these periods.

 Media segment income from operations for the three-month period ended June 30, 2012 increased 82.9% , or $11.4 million , to $25.1 million , from $13.7 million in the same period of the prior year, and represented 27.6% and 26.4% of Media segment revenue in these respective periods. Media segment operating margin increased from the prior year primarily due to the inclusion of Dotomi.

Owned & Operated Websites segment income from operations for the three-month period ended June 30, 2012 decreased to $8.7 million from $8.9 million in the same period of the prior year.  The operating margin for this segment increased to 23.9% in the current period compared to 21.9% in the year ago period due to the lower mix of paid traffic as described above.
 
Stock-Based Compensation.    Stock-based compensation for the three-month period ended June 30, 2012 increased to $5.7 million compared to $2.6 million for the same period in 2011 . The increase in stock-based compensation is primarily due to unvested stock awards assumed in connection with the acquisition of Dotomi. We currently anticipate stock-based compensation in the range of $22 million to $23 million for the year ending December 31, 2012. Such amounts may change as a result of higher or lower than anticipated equity award grants to new and existing employees, differences between actual and estimated forfeitures of stock awards, fluctuations in the market value of our common stock, modifications to our existing stock award programs, additions of new stock-based compensation programs, or other factors.
 
Amortization of Intangible Assets.    As discussed above under Cost of revenue , we corrected the accounting classification of the amortization of developed technologies and websites acquired in business combinations by including it in Cost of revenue beginning in the fourth quarter of 2011. All prior periods presented in the Condensed Consolidated Statements of Comprehensive Income included herein are presented using the new classifications. Previously, all amortization expense was recorded in operating expenses in the Amortization of intangible assets acquired in business combinations line item.

Amortization of developed technologies and websites acquired in business combinations, included in Cost of revenue , for the three-month period ended June 30, 2012 , was $2.5 million compared to $2.8 million in the year ago period. Amortization of all remaining intangible assets, included in Amortization of intangible assets acquired in business combinations , increased to $6.3 million for the three-month period ended June 30, 2012 compared to $3.4 million for the same period in 2011 . The increases in amortization of intangible assets are due to the acquisition of Dotomi. We currently anticipate total amortization expense of approximately $32.4 million for the year ending December 31, 2012.
 
Interest and Other Income, Net. Interest and other income, net increased to $1.5 million for the three-month period ended June 30, 2012 compared to $0.7 million for the same period in 2011 , an increase of $0.8 million . The increase was primarily due to foreign currency exchange gains recognized in the current period.

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  Income Tax Expense. For the three-month period ended June 30, 2012 , we recorded income tax expense of $13.3 million compared to $10.2 million for the same period in 2011 . The increase in the effective income tax rate for the three-month period ended June 30, 2012 to 39.5% from 37.5% in the same period of the prior year was primarily due to increased stock-based compensation and the corresponding tax limitations on the deductibility of such compensation. We currently anticipate an effective income tax rate for the year ending December 31, 2012 of approximately 38% .

RESULTS OF OPERATIONS—SIX-MONTH PERIOD ENDED JUNE 30, 2012 COMPARED TO JUNE 30, 2011
 
Revenue.    Consolidated revenue for the six -month period ended June 30, 2012 was $313.8 million compared to $241.6 million for the same period in 2011 , representing a 29.9% increase, or $72.3 million .

Affiliate Marketing segment revenue increased to $70.7 million for the six -month period ended June 30, 2012 compared to $67.1 million in the same period in 2011 . This increase of $3.6 million , or 5.4% , was attributable to our domestic operations and due to an increase in transaction volumes associated with existing customers and an increase in the number of customers.

Media segment revenue increased to $171.8 million for the six -month period ended June 30, 2012 compared to $96.2 million for the same period in 2011 . The increase of $75.6 million , or 78.6% , in Media segment revenue was attributable to the acquisitions of Dotomi and Greystripe. The remainder of the increase is due to organic growth in our domestic display businesses as a result of larger sales organizations and new product offerings.
 
Owned & Operated Websites segment revenue decreased to $71.5 million for the six -month period ended June 30, 2012 compared to $78.5 million in the same period in 2011 . The decrease of $7.0 million , or 8.9% , was primarily attributable to our efforts to reduce the volume of activity within the Owned & Operated Websites segment that relies on paid traffic and search monetization.

Cost of Revenue and Gross Profit.   Our consolidated cost of revenue was $123.8 million for the six -month period ended June 30, 2012 compared to $108.4 million for the same period in 2011 , an increase of $15.4 million , or 14.2% . Our consolidated gross margin was 60.5% and 55.1% for the six -month periods ended June 30, 2012 and 2011 , respectively.
 
Cost of revenue for the Affiliate Marketing segment decreased $0.3 million , or 3.0% , to $8.4 million for the six -month period ended June 30, 2012 compared to $8.6 million for the same period in 2011 . Our Affiliate Marketing gross margin remained relatively consistent at 88.2% for the second quarter of 2012 compared to 87.1% for the same period in 2011 .
 
Cost of revenue for the Media segment increased $23.0 million , or 51.7% , to $67.5 million for the six -month period ended June 30, 2012 compared to $44.5 million for the same period in 2011 due to the increase in revenue. Our Media segment gross margin increased to 60.7% for the six -month period ended June 30, 2012 compared to 53.8% for the same period in 2011 due to the inclusion of Dotomi as well as strong gross margin performance in our historical display business, particularly in the first quarter of 2012.
 
Cost of revenue for the Owned & Operated Websites segment decreased $7.5 million to $43.1 million for the six -month period ended June 30, 2012 compared to $50.5 million for the same period in 2011 . Our Owned & Operated Websites segment gross margin increased to 39.7% for the six -month period ended June 30, 2012 compared to 35.6% for the same period in 2011 due our efforts to decrease the mix of paid traffic which generates lower gross margin than our organic (non-paid) traffic sources.
 
Operating Expenses:
 
Sales and Marketing.   Total sales and marketing expenses for the six -month period ended June 30, 2012 were $42.1 million compared to $26.9 million for the same period in 2011 , an increase of $15.2 million , or 56.3% . The increase was primarily due to the acquisitions of Dotomi and Greystripe, including the associated higher stock-based compensation as described below, and increases in salaries and wages as a result of increased headcount in our sales staff. Our sales and marketing expenses as a percentage of revenue increased to 13.4% for the six -month period ended June 30, 2012 compared to 11.1% for the same period in 2011
 
General and Administrative.    General and administrative expenses increased to $39.8 million , or 12.7% of revenue, for the six -month period ended June 30, 2012 compared to $26.1 million , or 10.8% of revenue, for the same period in 2011 , an increase of $13.7 million , or 52.5% . The increase was primarily due to the acquisitions of Dotomi and Greystripe, including the associated higher stock-based compensation as described below.

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Technology.    Technology expenses for the six -month period ended June 30, 2012 were $33.0 million , or 10.5% of revenue, compared to $21.0 million , or 8.7% of revenue, for the same period in 2011 , an increase of $12.0 million , or 57.0% . The increase in technology expenses was primarily due to the inclusion of the Dotomi and Greystripe acquisitions, including the associated higher stock-based compensation as described below.

Segment Income from Operations.    Affiliate Marketing segment income from operations for the six -month period ended June 30, 2012 increased 7.6% , or $3.0 million , to $42.6 million , from $39.6 million in the same period of the prior year, and represented 60.3% and 59.0% of Affiliate Marketing segment revenue in these respective periods.

 Media segment income from operations for the six -month period ended June 30, 2012 increased 84.8% , or $21.8 million , to $47.5 million from $25.7 million in the same period of the prior year, and represented 27.7% and 26.7% of Media segment revenue in these respective periods.

Owned & Operated Websites segment income from operations for the six -month period ended June 30, 2012 decreased to $15.6 million from $15.9 million in the same period of the prior year, a decrease of $0.4 million , or 2.2% . The operating margin for this segment increased to 21.8% compared to 20.3% in the prior year period due to the lower mix of paid traffic as described above.
 
Stock-Based Compensation.    Stock-based compensation for the six -month period ended June 30, 2012 increased to $11.8 million compared to $4.5 million for the same period in 2011 . The increase in stock-based compensation is primarily due to stock awards assumed in connection with the acquisitions of Dotomi and Greystripe.
 
Amortization of Intangible Assets.    Amortization of developed technologies and websites acquired in business combinations, included in Cost of revenue , for the six -month period ended June 30, 2012 , was $5.0 million compared to $4.9 million in the year ago period. Amortization of all remaining intangible assets, included in Amortization of intangible assets acquired in business combinations , increased to $12.6 million for the six -month period ended June 30, 2012 compared to $6.1 million for the same period in 2011 . The increases in amortization of intangible assets are due to the acquisitions of Dotomi and Greystripe.
 
Interest and Other Income, Net. Interest and other income, net increased to $1.7 million for the six -month period ended June 30, 2012 compared to $1.1 million for the same period in 2011 . Interest and other income, net was higher in the current year primarily due to foreign currency exchange gains recognized in the current year period.
 
Income Tax Expense. For the six -month periods ended June 30, 2012 and 2011 , we recorded income tax expense of $22.3 million and $20.3 million on pre-tax income of $64.2 million and $54.1 million , respectively. The decrease in the effective income tax rate to 34.8% from 37.5% in the same period of the prior year was primarily due to recognition of certain state tax law changes and tax benefits related to the reversal of contingency reserves associated with the expiration of certain statutes of limitations during the current year period.

Adjusted-EBITDA as a Non-GAAP Financial Performance Measure

In evaluating our business, we consider earnings from continuing operations before interest, income taxes, depreciation, amortization, stock-based compensation, and acquisition-related costs ("Adjusted-EBITDA"), a non-GAAP financial measure, as a key indicator of financial operating performance and as a measure of the ability to generate cash for operational activities and future capital expenditures. We use Adjusted‑EBITDA in evaluating the overall performance of our business operations. We believe that this measure may also be useful to investors because it eliminates the effects of period-to-period changes in income from interest on our cash and cash equivalents, note receivable, and borrowings, and the costs associated with income tax expense, capital investments, acquisitions, and stock‑based compensation expense which are not directly attributable to the underlying performance of our continuing business operations. Investors should not consider this measure in isolation or as a substitute for income from operations, or cash flow from operations determined under U.S. Generally Accepted Accounting Principles (“GAAP”), or any other measure for determining operating performance that is calculated in accordance with GAAP. In addition, because Adjusted‑EBITDA is a non-GAAP measure, it may not necessarily be comparable to similarly titled measures employed by other companies.






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Table of Contents

The following is a reconciliation of net income to Adjusted‑EBITDA for the three - and six -month periods ended June 30, 2012 and 2011 (in thousands):
 
Three-month Period
Ended June 30,
 
Six-month Period
Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
 
Net income
$
20,336

 
$
16,981

 
$
41,907

 
$
33,843

   Interest and other income, net
(1,497
)
 
(657
)
 
(1,726
)
 
(1,065
)
   Income tax expense
13,262

 
10,210

 
22,333

 
20,264

Amortization of acquired developed technology and websites included in cost of revenue
2,492

 
2,758

 
4,985

 
4,938

Amortization of acquired intangible assets included in operating expenses
6,321

 
3,389

 
12,645

 
6,097

   Depreciation and leasehold amortization
2,803

 
1,762

 
5,433

 
3,516

   Stock-based compensation
5,748

 
2,614

 
11,834

 
4,531

Adjusted-EBITDA
$
49,465

 
$